If Everyone’s Making Organic Foods, Are Organic-Food Stocks’ Days Numbered?

Between 700% gains in Whole Foods Market (WFM) shares and great returns on several food manufacturers, shareholders have made a ton of money on the rising popularity of organic and natural foods. But are investors expecting too much of these companies now? Share prices lately in several popular organic plays, as seen in a stock chart, suggest that some investors believe there’s little to gain here going forward.

Shares of Whole Foods have underperformed even though the company hit earnings targets and declared a special $2/share dividend in November. The Fresh Market (TFM), its younger, smaller, competitor, attracted at least one sell rating after grossly missing analyst earnings targets. Shares of Annies (BNNY), a popular IPO in March 2012, and The Hain Celestial Group (HAIN), which doubled in the first eight months of 2012, have been more or less sliding since September.

Competition is the key worry. Now that organics is clearly no passing fad, every food producer and grocer wants in on the game. Safeway (SWY), Kroger (KR) and even Wal-Mart Stores (WMT) are clearing more shelf space for organics, eating into the reasons one would go to Whole Foods and Fresh Market. That trend does make room for more of Annie’s $1.50 a box bunny pasta, but it’s a harder sale when Kraft’s Macaroni and Cheese goes for 99 cents on the next aisle. Private labels make veggie straws and beet chips too, and they sell them cheaper than Hain’s Garden of Eatin’ and Terra Chips brands. So can Kraft Foods Group (KRFT) and General Mills (GIS). Even Dean Foods (DF), famous for sausage no organic fanatic would touch, became serious competition in organic dairy with its WhiteWave Foods (WWAV) line that it spun off last year.

Officially, most analysts still recommend buying the shares. Annie’s and Hain each carry more than twice as many buy ratings as holds on their shares. Whole Foods remains a favorite in the category. Fresh Market, whose CFO resigned in November, carries more hold ratings than the others.

All of these shares continue to trade at valuations suggesting tremendous growth. The chart below shows the historic price earnings ratio. (Annie’s, which went public in March 2012, has a trailing twelve month PE ratio of 56, and a forward PE of about 35.)

The two grocers carry the faithful with profit margins far and away above anyone else in the sector. The challenge for them is to keep same store sales from decelerating as customers pick up more of their products from non-natural foods competitors.

Optimism over Annie’s comes from its popularity with mothers of small children, and its limited distribution so far. It’s still a very small company, with annual revenues of about $155 million, and sells only a handful of products, like its iconic bunny shaped mac n cheese and crackers. Investors expect other popular products will follow, although the company has mixed success with that so far. Its cereals disappeared among competition from organic offerings from Kellogg’s (K) Kashi and General Mills’ Cascadian Farms. Annie’s has high hopes for a high priced frozen pizza but had to recall some of those products last week.

The competition for Hain brands particularly is intensifying. The number of Greek-style yogurt, dairy-free milk and veggie-based snack brands on grocer shelves, for example, has exploded in the past year.

Few doubt that the organic movement is strong enough to give each of these companies double-digit sales growth this year and next. The more pertinent question for investors is whether increasing competition will cause some of those big forecasts to get scaled back, which would of course put pressure on the share prices. It looks like someone’s worrying about that already.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.